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High Oil Prices, Not Hurricanes, Threaten Economic Recovery, Duke University Economist Says

Spikes in oil prices could have a dramatic effect on the U.S. economy

Hurricanes inflict billions in damages, but it's oil prices in the $50-a-barrel range that may halt the U.S. economic recovery, says a Duke University economist.

"Since we import much of our oil, a persistent rise in oil prices dampens consumer demand and may disrupt industries with heavy dependence on oil for energy," said Craig Burnside, professor of economics at Duke. "The economy is much less oil intensive now than it used to be, but the last four recessions were associated with spikes in oil prices. Given the magnitude of the current rise, high oil prices must be taken seriously."

Hurricane damage decreases output, consumer income and consumer demand, but businesses and the government tend to step in and increase spending to rebuild, which creates demand, Burnside said. All of these effects dissipate in time and are likely to be small in relation to the economy as a whole.

"The estimated $15 billion in insured damage attributed to Frances, Charley and Ivan represents less than 1/20th of one percent of the economy's roughly $35 trillion in fixed assets and durable goods," Burnside said. 

Burnside said the effect of high oil prices will depend on how long they last. If oil remains at $50 a barrel rather than dropping back to $30 soon, the recovery could come to a halt. "Eventually, firms will have to adjust the ways they conduct business to avoid losses," Burnside said.

The Federal Reserve could find itself under pressure to slow the recent trend toward higher interest rates in order to re-energize the recovery. However, such accommodative monetary policy carries significant risks, said Burnside.

"Many people blame a loosening of monetary policy by the Fed for the 'stagflation' of the 1970s," Burnside said. "The Fed will likely not make the same mistake this time, and any decision to slow the rise of interest rates will likely not need to be taken until after the upcoming election."

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